VAT and fuel hikes likely to scupper low inflation benefits

JOHANNESBURG -
The rand and JSE yesterday cheered March inflation print, which came in at a seven-year low - the lowest rate since February of 2011.

However, consumers can't expect to breathe easier with more money in their pockets as the pending hike in the value-added tax (VAT) and a surge in fuel prices this month are expected to put a damper on the slowdown in inflation.

The local currency raced to R11.93 against the dollar by 5pm from the day's high R12.04.

Statistics South Africa said the consumer price index (CPI) rose 3.8 percent year-on-year last month, from a 4 percent gain in February and below market consensus of a 4.1 percent increase.

This was also the longest run since 2015 that inflation remained within the central bank’s target range of 3 percent to 6 percent.

On a monthly basis, consumer prices increased 0.4 percent in March, compared to a 0.8 percent rise in the previous month, and below market expectations of a 0.6 percent gain.

The deceleration in inflation came on the back of lower prices fuel, food and non-alcoholic beverages in the period.

The petrol price increased by 72 cents a litre and diesel by 65 cents litre this month.

Lara Hodes, an economist at Investec, said she forecast CPI inflation to moderate to 4.9 percent year-on-year for 2018 and come out at 5.4 percent year-on-year in 2019.

“Additional consumer taxes set out in the 2018 budget, which came into effect from the 1st April will heavily impact inflation for the twelve months, commencing from the second quarter and so elevate the CPI outcome,” Hodes said.

Africa economist John Ashbourne said the VAT increase and other factors would see the central bank’s monetary policy committee (MPC) keep the repo rate on hold at its next meeting.

“We expect that headline inflation will pick up in April due to a VAT rise and higher municipal energy tariffs. Given increasing inflationary pressures, we expect that policymakers will keep their key rate on hold at their MPC meeting in May,” Ashbourne said.

The last SA Reserve Bank MPC cut the benchmark interest rate by 25 basis points to 6.5 percent in light of the improved inflation outlook.

However, the central bank warned that the VAT increase was expected to add about 0.6 percentage points to the headline inflation trajectory for the four quarters from the second quarter of 2018.

Meanwhile, improved confidence, low inflation and fuel price declines in February led to a surge in retail sales in February.

RETAIL SALES

The retail sales for February pointed to robust consumer spending in the first quarter.

Statstics SA said retail sales jumped 4.9 percent year-on-year in February, from a growth of 3.3 percent year-on-year in the prior month.

February’s print was well above market consensus of 3 percent gain. The positive annual growth rates were recorded in six of the seven sectors in February.

General dealers, textiles, clothing, footwear and leather all made positive contributions.

However, the worst performing retail sector in was paint and glass and hardware.

“With consumer inflation at a seven-year low, supporting the purchasing power of consumers, in combination with a 25 basis point cut in interest rates end-March, moderating household debt levels and improved confidence flowing from recent political developments will lead to growth,” Kruger said.